The January 2009 Senior Loan Officer Opinion Survey on Bank Lending Practices addressed changes in the supply of, and demand for, loans to businesses and households over the past three months.1 The survey also included three sets of special questions: The first set asked banks about changes in lending policies on commercial real estate loans over the past year and new extensions of such loans over the second half of 2008; the second set queried banks about changes in the size of existing credit lines for businesses and households; and the third set asked banks about the use of interest rate floors in floating-rate loan agreements with both businesses and households. This article is based on responses from 53 domestic banks and 23 U.S. branches and agencies of foreign banks.

In the January survey, the net fractions of respondents that reported having tightened their lending policies on all major loan categories over the previous three months stayed very elevated. Relative to the October survey, these net fractions generally edged down slightly or remained unchanged. Respondents indicated that demand for loans from both businesses and households continued to weaken, on balance, over the survey period.

In response to the special questions on commercial real estate lending, significant net fractions of both foreign and domestic institutions reported having tightened over the past year all loan policies about which they were queried. At the same time, about 15 percent of domestic banks, on net, indicated that the shutdown of the securitization market for commercial mortgage-backed securities (CMBS) since the middle of 2008 has led to an increase in the extension of new commercial real estate loans at their bank. Regarding the other special questions, banks reported having reduced credit limits on existing credit lines over the last three months across a wide range of loan types. Banks also reported an increase in the use of interest rate floors in new loan agreements during 2008.

Questions on Lending to Businesses

(Table 1, questions 1-10; Table 2, questions 1-10)

Commercial and industrial lending. About 65 percent of domestic banks reported having tightened lending standards on commercial and industrial (C&I) loans to large and middle-market firms over the past three months. This percentage was down from the reported tightening in the October survey but still above the previous peaks reported in 1990 and 2001. At about 70 percent, the fraction of domestic respondents that tightened standards on C&I loans to small firms was only slightly lower than that found in the October survey. Significant majorities of domestic respondents indicated that they had further tightened price terms on C&I loans to firms of all sizes over the past three months. Around 90 percent of domestic banks indicated that they had increased spreads of loan rates over their cost of funds for C&I loans to large and middle-market firms and to small firms--fractions slightly lower than those in the October survey. Likewise, very large fractions of banks reported having charged higher premiums on riskier loans and having increased the costs of credit lines to firms of all sizes over the survey period.

On net, the fractions of banks that reported having tightened nonprice terms on C&I loans to large and middle-market firms over the past three months stayed at an elevated level but declined relative to the October survey. Large fractions of banks again noted that they had reduced both maximum size and the maximum maturity of loans or credit lines to firms of all sizes. In addition, about 70 percent of all domestic respondents reported having tightened covenants on C&I loans to large and middle-market firms and about 60 percent reported having done so on such loans to small firms.

U.S. branches and agencies of foreign banks also tightened their business lending stance further over the past three months. About 65 percent of foreign institutions, a slightly smaller percentage than in October, indicated in the January survey that they had firmed their lending standards on C&I loans. Large fractions of foreign respondents had tightened price and nonprice terms on C&I loans over the survey period, including increasing the premiums charged on riskier loans, raising the cost of credit lines, and reducing the maximum size of credit lines. The majority of foreign banks also reported that they had imposed more-restrictive covenants and collateralization requirements on C&I loans.

All domestic and foreign respondents pointed to a less favorable or more uncertain economic outlook as a reason for tightening their lending standards and terms on C&I loans over the past three months. Most respondents indicated that a worsening of industry-specific problems and their bank's reduced tolerance for risk were also important factors in their decision to tighten C&I lending policies. In contrast, only about 25 percent of the domestic respondents that had tightened standards or terms noted that a deterioration in their bank's current or expected capital position had contributed to the change, in comparison with approximately 40 percent in the October survey. High net percentages of foreign respondents gave as reasons for tightening standards and terms on C&I loans decreased liquidity in the secondary market for C&I loans (75 percent) and an increase in defaults by borrowers in public debt markets (70 percent).

On balance, domestic and foreign respondents reported a further weakening of demand for C&I loans over the past three months. On net, about 60 percent of domestic respondents reported a reduction in demand for such loans from firms of all sizes, compared with about 15 percent of respondents that, on net, had reported a decrease in C&I loan demand in the October survey. About 25 percent, on net, of U.S. branches and agencies of foreign banks saw a decrease in demand for C&I loans over the past three months, compared with the 5 percent of respondents, on net, in the October survey.

Substantial majorities of the domestic institutions that had experienced weaker demand for C&I loans over the past three months pointed to decreases in their customers' needs to finance investment in plant and equipment, to finance mergers and acquisitions, to finance inventories, and to finance customer accounts receivable as reasons for the weaker demand. Among the few domestic respondents that saw an increase in loan demand over the past three months, all indicated that business borrowing had shifted to their bank from other bank or nonbank sources because the other sources had become less attractive. In addition, over 30 percent of domestic and foreign institutions, on net, reported that inquiries from potential business borrowers had decreased during the survey period.

Commercial real estate lending. On balance, about 80 percent of domestic banks reported that they had tightened their lending standards on commercial real estate (CRE) loans over the past three months, slightly less than the roughly 85 percent that reported doing so in the October survey. Fifty percent of foreign respondents also indicated that they had tightened their lending standards on CRE loans. On net, about 55 percent of domestic and foreign respondents reported weaker demand for CRE loans over the survey period.

In response to special questions on CRE lending, significant net fractions of banks reported having tightened many lending policies on CRE loans. Over 2008 as a whole, about 95 percent of domestic banks increased their loan-rate spreads, and about 80 percent tightened their loan-to-value ratios. About 75 percent of foreign respondents, on net, reported wider loan-rate spreads, and about 65 percent, on net, had reduced their loan-to-value ratios. About 30 percent of the domestic respondents indicated that the shutdown of the CMBS securitization market had led to an increase in CRE lending at their bank over the second half of 2008, whereas about 15 percent indicated that the shutdown of the CMBS securitization market had reduced the volume of their CRE lending.

Questions on Lending to Households

(Table 1, Questions 11-20)

Residential real estate lending. Smaller, though still substantial, fractions of domestic respondents reported having tightened lending standards on prime and nontraditional residential mortgages in the January survey. About 45 percent of domestic respondents indicated that they had tightened their lending standards on prime mortgages over the past three months, and almost 50 percent of the 25 banks that originated nontraditional residential mortgage loans over the survey period reported having tightened their lending standards on such loans. About 10 percent of domestic respondents saw weaker demand, on net, for prime residential mortgage loans over the past three months, a significantly lower fraction than the roughly 50 percent that so reported in the October survey. About 65 percent of respondents--a slightly lower percentage than in the October survey--reportedly experienced weaker demand for nontraditional mortgage loans over the same period. Only four banks reported making subprime mortgage loans over the past three months.

On net, about 60 percent of domestic respondents, down from 75 percent in the October survey, noted that they had tightened their lending standards for approving applications for revolving home equity lines of credit (HELOCs) over the past three months. Twenty percent of domestic banks, on net, reported weaker demand for HELOCs over the past three months, slightly less than the percentage that had reported weaker demand in the October survey.

Consumer lending. Large fractions of domestic banks continued to report a tightening of policies on both credit card and other consumer loans over the past three months. Nearly 60 percent of respondents indicated that they had tightened lending standards on credit card and other consumer loans, about the same fractions as in the October survey. Close to 55 percent of respondents reported having reduced the extent to which both credit card accounts and other consumer loans were granted to customers who did not meet credit-scoring thresholds. Roughly 45 percent of the respondents also reported having raised minimum required credit scores on credit card accounts and other consumer loans, a proportion slightly lower than posted in the October survey. About 45 percent of banks reported having lowered credit limits for either new or existing credit card customers, down from the 60 percent that reported doing so in the October survey.

On net, about 15 percent of domestic banks indicated that they had become either somewhat or much less willing to make consumer installment loans over the past three months, a notable change from the roughly 45 percent that so indicated in the October survey. About 45 percent of respondents, on net, reported that they had experienced weaker demand for consumer loans of all types, similar to the fraction in the October survey.

Special Questions

(Table 1, questions 21-23; Table 2, questions 11-13)

Existing credit lines. The January survey included a special question that queried banks on how they had changed the sizes of credit lines for existing customers for a number of account types over the past three months. On net, domestic banks reported that they had reduced the size of existing credit lines for all major types of business and household accounts. Regarding existing accounts for businesses, roughly 60 percent, on balance, reported a decrease in the limits on commercial construction lines of credit, about 50 percent indicated a decrease in the limits on credit lines extended to financial firms, about 30 percent indicated a decrease in credit limits on business credit card accounts, and roughly 25 percent noted a decrease in the size of C&I credit lines. On net, large fractions of foreign banks also decreased limits on commercial construction lines of credit, credit lines extended to financial firms, and C&I credit lines. Regarding accounts for households, about 40 percent of domestic banks reported having reduced the sizes of existing home equity lines of credit, on net, and approximately 35 percent reported having trimmed existing consumer credit card account limits.

Use of interest rate floors. The January survey also included special questions regarding the use of interest rate floors in floating-rate loan agreements during 2008. Eighty percent of domestic banks cited an increase in their use of interest rate floors in such agreements with businesses last year, while about 45 percent of domestic banks cited an increase in the use of such rate floors on loans to households over the same period. No domestic bank reported a reduction in the use of interest rate floors on loans to businesses or households last year. Large fractions of domestic banks, however, noted that less than 5 percent of their outstanding loans--to both households and businesses--currently had interest rate floors that were binding, and only a small number of respondents indicated that the majority of their outstanding loans to households or businesses had binding rate floors.

1Respondent banks received the survey on or after December 30, 2008, and their responses were due January 13, 2009. Return to text

This document was prepared by Seung Lee and Tara Rice with the assistance of Robert Kurtzman, Division of Monetary Affairs, Board of Governors of the Federal Reserve System.